The Canadian dollar is one of 100s of different monies. The three big monies: the U.S. dollar, yen, and euro. In February 2007, one Canadian dollar bought 85 U.S. cents. By November 2007, the Canadian dollar soared to $US1.09. Why do currency exchange rates fluctuate? From the early 1980s until 1999, Canada’s imports exceeded its exports and Canada borrowed a total of $223 billion. During the 2000s, Canada’s exports exceeded its imports, and Canada repaid $178 billion of its earlier borrowing. Why does Canada sometimes borrow from foreigners, and at other times repay its international debts?
The Foreign Exchange Market The Demand for One Money Is the Supply of Another Money When people who are holding one money want to exchange it for Canadian dollars, they demand Canadian dollars and they supply that other country’s money. So the factors that influence the demand for Canadian dollars also influence the supply of foreign currency–U.S. dollars, euros, pounds, and yen. The factors that influence the demand for another country’s money also influence the supply of Canadian dollars.
Supply in the Foreign Exchange Market The quantity of Canadian dollars supplied in the foreign exchange market is the amount that traders plan to sell during a given time period at a given exchange rate. This quantity depends on 1. The exchange rate 2. Canadian demand for imports 3. Interest rates in Canada and other countries 4. The expected future exchange rate The Foreign Exchange Market
Exchange Rate Fluctuations Changes in the Demand for Canadian Dollars A change in any influence on the quantity of Canadian dollars that people plan to buy, other than the exchange rate, brings a change in the demand for Canadian dollars and a shift in the demand curve for Canadian dollars. These other influences are World demand for Canadian exports Canadian interest rate relative to the foreign interest rate The expected future interest rate
Changes in the Supply of Dollars A change in any influence on the quantity of Canadian dollars that people plan to sell, other than the exchange rate, brings a change in the supply of dollars and a shift in the supply curve of dollars. These other influences are Canadian demand for imports Canadian interest rates relative to the foreign interest rate The expected future exchange rate Exchange Rate Fluctuations
Changes in the Exchange Rate If demand for Canadian dollars increases and supply does not change, the exchange rate rises. If demand for Canadian dollars decreases and supply does not change, the exchange rate falls. If supply of Canadian dollars increases and demand does not change, the exchange rate falls. If supply of Canadian dollars decreases and demand does not change, the exchange rate rises. Exchange Rate Fluctuations